As ENX magazine went to press, the earnings season for the opening months of 2016 was wrapping up and the news from hardcopy hardware manufacturers was not good. The strengthening yen and weaker markets in various regions worldwide left Japanese firms with flagging sales and unit shipments as well as shrinking profits. Companies in the United States didn’t fare much better. As it has for several years, business continued to sputter for the U.S. companies in 2016 and revenue was off. Unfortunately, conditions are not expected to improve much for the industry this year.
For the past couple of years, the best performing companies in the office imaging equipment industry have been based in Japan. Since Japan embarked on its mission to weaken its currency, most Japanese companies regardless of industry have benefited as the value of the yen has fallen. The performance of Japanese companies ailing prior to the yen’s devaluation such as Epson, Oki, Ricoh, and others has improved thanks in part due to favorable exchange rates. And at firms like Brother, Fujifilm, and Konica Minolta where things had been good before the yen weakened, business thrived. The ill effects of economic slowdowns in certain regions such as Brazil, China, and Russia began to slow business at many hardware vendors last year. Most of these firms don’t expect things to change anytime soon and the yen is strengthening, which can only make matters worse.
Lacking the shot in the arm the weaker yen provided to their Japanese rivals, it’s been a long time since manufacturers in the U.S. have reported strong growth and the bad news has continued this year. Despite taking radical steps to restructure their respective companies and be more competitive, Hewlett-Packard, Lexmark, and Xerox has each reported its business has been off in 2016 and none is predicting growth.
HP and Canon
Because of its unique fiscal year, which ends on October 31, HP was the first hardware manufacturer from the hardcopy industry to report its quarterly financial results in 2016 and the news was concerning. On February 24, the firm reported that revenue from its printer business during the first three months of the current fiscal year dropped 17 percent to $4.6 billion compared with $5.6 billion during the same period in 2015.
The bulk of HP’s Printing revenue comes from supplies sales, and consumables revenue was down nearly 14 percent year-over-year from $3.6 billion in the first quarter of 2015 to $3.1 billion in the first quarter of 2016. Declining supplies sales was 8 percent in constant currency. Hardware revenue fared no better. Commercial hardware revenue contracted 13 percent, declining from $1.4 billion to $1.2 billion. Meanwhile, consumer hardware revenue shrank by a stunning 46 percent to $322 million, down from $601 million in the first quarter of 2015. Shipments of commercial hardware units slipped 15 percent and consumer hardware units plunged 23 percent as HP experienced some of its steepest hardware shipment declines since the recession. Total unit shipments in HP’s Printing business were down 20 percent compared to Q1 FY15 making it the seventh straight quarter of falling printer shipments.
On April 26, HP’s long-time supplier of laser printer technology, Canon Inc., announced its financial results for the first quarter of 2016 and as one would expect the news was not good. Canon’s net sales shrank by 7 percent compared with the year-ago period to about ¥797.2 billion or just over $7 billion. Net sales fell 14.1 percent year-over-year in Canon’s Office Business unit, which is responsible for marketing the firm’s printers and copiers. Net sales totaled ¥454.4 billion or about $4 billion while the group’s operating profit fell by a whopping 37.7 percent to ¥44.7 billion or just shy of $400 million.
Total unit sales of Canon’s office MFDs—a.k.a. “copiers”—grew a tepid 1 percent. While color office MFD unit sales were up a respectable 11 percent, that growth was offset by a 6 percent dip in monochrome copier units. The big factor in the Office Business’s downturn, however, was Canon’s laser printer business, which corresponded to HP’s lousy Q1 commercial hardware sales. Total printer unit shipments were down 21 percent year-over-year, and net sales fell even more sharply, plummeting 25.7 percent from the year prior.
According to Canon Executive Vice President and CFO Toshizo Tanaka, his firm also saw “lower laser printer consumables sales” in Q1. Declines in laser consumables sales adversely impacted laser printer revenue, as well as profits in the Office Business and the company as a whole. Mr. Tanaka admitted that competition from non-Canon cartridges adversely impacted the firm’s business and said that Canon is possibly seeing a “growing shift towards third-party solutions.”
Canon’s inkjet printer business also declined during the first quarter of 2016. Shipments of inkjet units shrank by 1 percent year-over-year and inkjet printer net sales fell by 5.6 percent in the first quarter. Despite the lackluster results, Canon experienced an upturn in unit sales in developed markets such as Europe, the United States, and Japan, due to sales promotions for new products.
More Bad News from U.S. Vendors
The day before Canon reported its first quarter results, Xerox had more bad news for its shareholders. On April 26, Xerox reported business was off in the first quarter of 2016 compared with the first quarter of 2015 and revenue fell 4 percent to about $4.3 billion. Xerox blamed some of the decline on fluctuations in foreign currencies but in constant currency total revenue declined 3 percent. Xerox divides its business into two units: Service and Document Technology. Service revenue grew 1 percent year-over-year (up 2 percent in constant currency) to $2.5 billion but Document Technology revenue was down 10 percent from $1.8 billion in Q1 FY15 to $1.6 billion in the first quarter of this year.
Total equipment sales for both the Service and Document Technology units were down 10 percent to $560 million during the quarter just ending. Xerox blamed the decline on weaker developing markets, bad product launch timing, and continuing price declines. Within Document Technology, equipment sales shrank from $509 million to $432 million, a 15 percent decline. Document Technology’s operating margin in Q1 FY16 dropped to 10.2 percent from 12.7 percent during the first quarter of last year. Installs of black-and-white multifunction devices were down 16 percent due to continued declines in developing markets, while installs of color multifunction devices were up 1 percent. In the mid-range segment, installs of black-and-white devices were down 14 percent due to the transition to color and weaker developing markets while installs of midrange color devices grew by 1 percent. In the high-end segment, there was an 8 percent decline in black-and-white systems and an impressive 56 percent increase in color systems.
Xerox’s April earnings call was the first following the January news that it plans to split into two companies. In a prepared statement, Ursula Burns, Xerox chairman and CEO, said she was “pleased with our progress on our strategic transformation and separation.” Ms. Burns explained that the company is mapping its path to the separation and it has begun to build “the strategic, operational, and financial foundation of each company.” Xerox expects to realize approximately $700 million in annualized savings in 2016 from ongoing and incremental initiatives. It recorded $126 million in restructuring and related costs in the first quarter and expects total restructuring and related costs of $300 million for the full year. Xerox had $124 million in severance costs in Q1 FY15 associated with reducing its headcount by 4,800 employees worldwide.
Lexmark reported its Q1 results on April 27, the day after Xerox. With revenue down a mere 5.4 percent year-over-year to $806.2 million during the quarter, Lexmark was the best performing U.S. firm in the hardcopy industry, but clearly that’s not saying much. Gross margin for the quarter was 38 percent versus 38.7 percent last year and Lexmark had an operating loss of $38.5 million versus operating income of $42.2 million one year ago. The firm’s first quarter operating income margin shrank from 5 percent last year to 4.8 percent in the first quarter of 2016.
Like Xerox, Lexmark released its quarterly results after the firm made a major shareholder announcement. On April 19, Lexmark revealed plans to sell the company to a consortium of Chinese investors led by Apex Technology, PAG Asia Capital, and Legend Capital in an all-cash transaction valued at $40.50 per share or $3.6 billion, well over Lexmark’s market capitalization of about $2.2 billion. Lexmark did not hold an earnings call with analysts and investors to discuss its first-quarter results, and the company says it will not conduct quarterly conference calls while the transaction between the consortium and Lexmark is pending. This means that compared with prior quarters, Lexmark’s Q1 FY16 results lack much detail. Lexmark did not provide any guidance for the upcoming quarter and the year ahead.
Epson and Brother Grow Sales, But…
On April 28, Seiko Epson announced its financial results for the full fiscal year 2015. While the news wasn’t as bad as what Canon reported, FY15 was not good for Epson. As the yen weakened during 2013 and 2014, Epson’s business surged. Not only did revenue grow but so did profits and in the previous fiscal year Epson achieved its highest-ever annual net income. Epson managed to grow revenue in FY15 but at a sluggish rate, and profitability tumbled as net income fell by almost 60 percent. The firm missed some of its targets for its full-year performance, and Epson’s forecast for 2016 shows that the company expects to see its revenue and business profit decline in the year ahead.
Epson reported that it saw flat or weakening demand across most of its business lines and that in general business conditions grew harsher in the second half of the previous fiscal year. As we heard from so many firms, Epson attributed its poor performance on the sluggish pace of economic recovery worldwide and cooling economies in regions like Latin America and China. Epson noted that currency exchange was an aggravating factor as well. While the yen depreciated against the dollar, the company explained that the yen appreciated against the euro and the currencies in some emerging economies, including in Latin America.
For the full year, Epson had ¥1.092 trillion ($9.7 billion) in revenue, which was up roughly 0.6 percent from the year prior but short of the company’s revenue forecast of ¥1.1 trillion. Epson’s profit for the period was ¥46.1 billion ($408.8 million), down a whopping 59.2 percent from the year prior. Epson had anticipated a higher profit of ¥60.0 billion. Epson’s profitability suffered in fiscal 2015 due in part to a very tough comparison. In the first quarter of fiscal 2014, Epson realized a ¥30 billion one-time profit due to revisions in its pension plan. This helped drive up Epson’s net income to a historic high that year. Right from the very start of fiscal 2015, Epson was clear that profit for the period would decline compared with fiscal 2014.
Epson’s business profit in fiscal 2015 was just shy of ¥85.0 billion ($753.9 million), down 16.1 percent from fiscal 2014, and the business profit margin shrank from 9.3 percent in 2014 to 7.8 percent in 2015. Business profit is one place where the firm actually exceeded its guidance, however. Although its business profit was lower in FY15 than in the year prior, it exceeded Epson’s earlier guidance. The firm had said it anticipated a business profit of ¥82 billion in fiscal 2015, which it exceeded by ¥3 billion.
Brother reported on May 9 that it had record sales in 2015 but its operating income, operating margin, and net income for the year were down sharply. Brother managed to grow net sales 5.5 percent to ¥745.9 billion ($6.6 billion) in FY15. Without the foreign exchange rates (FOREX) impact, net sales would have grown 4 percent. Brother, however, missed its guidance for net sales, which called 6.8 percent year-over-year growth to ¥755.0 billion. Still, Brother pointed out that its net sales total for 2015 was a record for the company thanks in part to the acquisition of the industrial printer manufacturer Domino Printing Sciences.
During fiscal 2015, Brother’s Printing and Solutions business grew 0.5 percent to ¥476.8 billion ($4.2 billion). However, the growth was largely a result of an uptick in sales of electronic stationery and printing equipment business net sales were down 0.1 percent for the year. Printing and Solutions had an operating income of ¥34.2 billion ($302.5 million) for all of fiscal 2015, which is 4.3 percent lower than in the year prior. The firm indicated that a big factor in the declining operating income was the yen’s appreciation against the euro. Without the FOREX effect, Brother said its operating income would have been about the same in the Printing and Solutions business as last year. The group’s operating profit ratio was 7.2 percent for the year, compared with 7.5 percent in the year prior.
Brother termed conditions in printing business as “severe” due to the market’s maturity and the slowdown in emerging countries. In 2015, however, the firm reported it experienced steady sales of color laser MFPs and its launch of high-capacity CISS-based ink tank models helped drive revenue. For fiscal 2016, Brother says it expects sales revenue of ¥657.5 billion, operating profit of ¥45.0 billion, and net income of ¥31.5 billion. The Printing and Solutions segment is expected to bring in revenue of ¥384.5 billion, with ¥338.9 billion coming from communications and printing equipment, and the group’s target for operating income is ¥29.4 billion. Because Brother plans to start using International Financial Reporting Standards (IFRS) this year, its guidance was given using IFRS standards rather than Japanese GAAP standards. As a result, Brother did not provide percentage changes for the upcoming year from the year just ended because it is not a direct apples-to-apples comparison.
More Signs of Weakness
While the fiscal year ending in March 2016 was not great for Ricoh, it was far from the worst we have seen from the firm. After suffering an absolutely disastrous fiscal year that ended in March 2012, the firm managed to turn things around, growing sales and margin in the fiscal years ended in March 2013 and 2014. On April 28, the firm reported that it experienced modest revenue growth last year, but full-year operating and net profit shrank. Total net sales grew 2.7 percent to ¥2.209 trillion ($20.6 billion) and, excluding any FOREX impact, net sales increased by 1 percent. While Ricoh managed to grow sales, its full-year total fell short of its forecast, which called for net sales of ¥2.25 trillion.
Ricoh’s mainstay Imaging and Solutions segment, which consists of Office Imaging, Production Printing, and Network System Solutions, had a tough fourth quarter, with sales falling 3.2 percent to ¥506.4 billion ($4.7 billion) and operating profit tumbling 39.3 percent to ¥28.2 billion ($263.4 million). The problem came mainly from the Office Imaging sector, which includes MFPs, copiers, and laser printers along with related supplies and services as well as devices like faxes and scanners. Sales slid 5.4 percent in this business in Q4. In contrast, sales were up in Q4 in Production Printing and Network System Solutions. For the full fiscal year, net sales in Imaging and Solutions grew 3 percent to ¥1.974 trillion ($18.4 billion). This was largely from growth in Production Printing and Network System Solutions, as sales in Office Imaging were down 0.5 percent from the year prior. Full-year operating profit for Imaging and Solutions was ¥147.5 billion ($1.4 billion), down 14.2 percent, due to a “sluggish business environment and intensifying competition.”
Ricoh is not optimistic about the upcoming year and said the global outlook is unpredictable due to the slowdown in emerging markets, turmoil in financial markets, and declines in resource prices. Ricoh expects ¥2.17 trillion in sales, ¥77.0 billion in operating profit, and ¥44.0 billion in net profit. This would represent a 1.8 percent decline in net sales, a 24.7 percent decrease in operating profit, and a 30.1 percent decrease in net profit compared with the year just ended in March 2016. The firm shared how it plans to reinforce its Office Imaging business by launching new products and making acquisitions. Future profit are expected from 3D printing and more focus on industrial applications such as thermal transfer ribbons, industrial laser and inkjet printing, and garment printing.
OKI Electric Industry Company reported its financial results for the fiscal year ended on March 31, 2016. It was a gloomy year for the company, which saw revenue, operating income, and net income decline. OKI’s net sales for the fiscal year ended on March 2016 totaled ¥490.3 billion ($4.5 billion), which represents a 9.2 percent decrease from the previous fiscal year. This is below OKI’s outlook, which called for full-year net sales of ¥515 billion. For the year ended in March 2016, OKI’s Printers business had net sales of ¥124.6 billion ($1.1 billion), down 3.6 percent from the previous fiscal year. While sales shrank, operating income plunged dramatically, falling 79.1 percent to ¥1.4 billion ($12.8 million). OKI missed its outlook for full-year Printers net sales of ¥130.0 billion and operating income of ¥2.0 billion.
OKI indicated that in the year ahead it expects economic conditions to remain sluggish in emerging countries. The firm anticipates that the office printer market will shrink and experience intensified competition. For the first half of the upcoming fiscal year, OKI expects net sales of ¥210 billion, operating income of ¥0, and net income of ¥0 and its Printer business is expected to see ¥64 billion in sales and operating income of ¥0. For the full fiscal year ending on March 31, 2017, OKI expects net sales of ¥500 billion, operating income of ¥20 billion, and net profit of ¥12.0 billion. If achieved, this would mark a 2 percent increase in net sales, a 7.5 percent increase in operating income, and an 81.6 percent increase in net profit from the year ended in March 2016. The outlook for full-year net sales in the Printers business is ¥133.0 billion, up 6.7 percent from the previous year, and the group’s outlook for operating income is ¥2.5 billion, which would mark a 78.6 percent increase.
On April 27, Fujifilm Holdings announced its financial results for the fourth quarter and fiscal year ended on March 31, 2016. Overall, it was a better year for Fujifilm than some of its competitors. This tells only part of the story, however. Fujifilm’s Document Solutions business, which is operated by Fuji Xerox Co. Ltd., reported weaker results over the course of the year. Like its rivals, Fujifilm noted that general economic conditions continued to recover in the year just ended, but there was an economic slowdown in China and weak economic conditions in emerging Asian countries. The company was also negatively impacted by depreciation in Asian currencies.
Missing its revenue target of ¥2.58 trillion for the year ending March 2016, Fujifilm had revenue of ¥2.492 trillion ($22.4 billion), about flat with the previous fiscal year. Sales fell by the low single digits in the Imaging Solutions segment for the year as well as in Document Solutions, but revenue grew in the Information Solutions business. Operating margin improved from 6.9 percent in the previous fiscal year to 7.7 percent. For the full year, Fujifilm’s operating income grew 10.9 percent to ¥191.2 billion ($1.7 billion), and net income grew 4 percent to ¥123.3 billion ($1.1 billion). Fujifilm was able to exceed its guidance for operating income of ¥190.0 billion and net income of ¥120.0 billion thanks in part to a reduction in the corporate tax rate.
For the full year ending March 2016, Document Solutions revenue dipped 0.3 percent year-over-year to ¥1.174 trillion ($10.55 billion). Looking at the group’s sales by product type shows a modest increase in revenue last year from office printers and production services and a bigger 5.2 percent uptick in global services revenue. However, full-year revenue shrank in office products (copiers and MFPs) and the group’s “other” segment. The full-year operating income for Document Solutions fell 6.4 percent to ¥94.9 billion ($853.0 million) and the group’s operating margin contracted to 8 percent for the year, compared with 8.5 percent in the year prior. Fujifilm explained that Document Solutions’ income was impacted by the higher cost of imports due to the appreciation of the dollar against the yen and a decrease in profit due to the depreciation of Asian currencies.
Fujifilm’s forecast for the year ending in March 2017 calls for revenue of ¥2.55 trillion, operating income of ¥220.0 billion, and net income of ¥125.0 billion. If achieved, these figures would mark increases of 2.3 percent, 15.1 percent, and 1.4 percent, respectively, from the year that ended in March 2016. The outlook for the Document Solutions business is for full-year revenue of ¥1.2 trillion and operating income of ¥110.0 billion. Fujifilm said it will grow its Document Solutions business by attempting to “increase sales through such measures as expanding sales volume by strengthening product line-up, strengthening business in the Asia-Oceania region, expanding service businesses of the global services business and the production services business, and by strengthening solutions.”
No End in Sight
As of this writing, Konica Minolta had yet to report its financial results for the fiscal year ending on March 2016 but we shouldn’t expect any departure from the trend we saw from other Japanese firms. In the second quarter, which ended on September 30, Konica Minolta had recast its forecast downward as market conditions deteriorated and demand weakened in various markets. At the very least, it’s safe to assume the company did not have a banner year.
As we approach the end of the first half of 2016, it is hard to see any indication that the market will turn around for hardware vendors this year. The economies in China, Latin America, and Russia show no signs of improving. In fact, we’ve seen signs that the North American market, which was the industry’s strongest in 2015, is softening. Moreover, the yen has continued to strengthen and the word out from Japanese bankers is that they will not intercede. Obviously, more bad news for Japan’s hardware manufacturers. For the U.S. manufacturers, word of a stronger yen will be welcome but it will do little to make up for flagging market demand.
Hardware manufacturers seem destined to experience more downward pressure on revenue, unit shipments, and profits as print volumes continue to decline and end users move away from hardcopy. It is inevitable that the competitive landscape will continue to change. The only thing that is for certain is that each year manufacturers continue to generate well in excess of $50 billion in revenue from the sale of hardcopy devices, supplies, and services. So, rest assured, gentle reader, the industry is huge and we’ll be watching to see which companies are able to grab some of that huge pot of gold as we move forward.
